Collapse in coal demand claims a US Patriot
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America’s natural gas boom has claimed its biggest victim so far with Patriot Coal — one of the country’s biggest miners of thermal and coking coal — collapsing with assets of $US3.5 billion. St. Louis-based Patriot filed for Chapter 11 bankruptcy reorganisation on Monday, US time. The collapse shows the pressures building in the huge US coal industry from changes being wrought by the shale gas boom.
That makes Patriot the largest casualty thus far of the slump in US coal demand to a 24-year low which has seen coal’s share of US electricity generation to just over 34%, (it was around 49% a year ago). That’s almost as much as produced by gas, which is up sharply thanks to the surge in shale gas production and the collapse in prices. In fact, the US Energy Information Agency reported late last month that US coal use in the first quarter was the lowest for any quarter since 1988 as power utilities have switched more and more of their plants to cheaper natural gas as regulations restricting emissions make coal costlier to burn. Gas prices fell to a decade low in April amid a surplus of the fuel.
Patriot is one of a number of US coal producers, including Peabody, Arch Coal and Alpha Natural Resources to have suffered significant share price losses in the past year as the shale (or “tight”) gas boom has seen output surge and prices fall, attracting more and more demand from power companies and other consumers. In turn that has seen a fall in green house gas emissions at a time when the US environmental rules are coming down harder on emissions from coal fired power stations.
Patriot collapsed even though it had around half a billion more in assets than its $US3.07 billion of debt. Patriot is negotiating with banks for an $US802 million debtor in possession finance package to pay for the reorganisation.
Patriot’s collapse comes after the loss of several thousand jobs in the US coal industry and the closure of a number of small private coal mines. CSX, the big US rail company reported a 28% slump in coal shipments in the first quarter as the slide in demand was made worse by a very warm winter and spring.
The EIA said that in the ”warmest March ever recorded in much of the United States, coal’s share of total net generation dropped to 34% — the lowest level since at least January 1973 (the earliest date for which EIA has monthly statistics). Despite seasonally low loads, natural gas-fired generation grew markedly and accounted for 30% of overall net generation by March 2012 (see chart above). Total electricity demand fell this winter as warmer weather reduced home heating requirements.”
Coal generation fell 29 billion kilowatthours from March 2011 to March 2012, while natural gas generation increased by 27 billion kilowatthours during the same time period. In March 2012, coal’s share of total generation was 34% compared to natural gas at 30%. In April that around 34% each. As a result, stocks of unsold coal at mines have surged, leading to desperate attempts to cut production and boost exports. The Agency said that 2011 coal exports were up 31% compared to 2010, due largely to rising exports to Europe and Asia. Coal stockpiles at US power plants in March 2012 (the latest EIA data available) were about 18% above the level in March 2011 and above the five-year range.
The fall in US coal prices because of weak demand (the warm winter and Spring in the US) and the rising use of gas, has seen global thermal coal prices driven down to well under $USS90 a tonne, a situation that has already seen exports and production from Australia curtailed. In fact spot thermal coal prices from Newcastle have been as low as $US74 a tonne in the last two weeks because of the oversupply of US coal in European and US markets. Contract prices for the 2012-13 year in north Asian were written at around $US105 a tonne in February.
In the US the oversupply of coal and falling prices has seen more and power companies renege on contracts and either ask for cheaper prices, or switch to cheaper natural gas, a situation that contributed to Patriot’s collapse and threatens to badly damage other US coal companies. In fact the share prices of other US coal companies including Peabody (which has a large presence in Australia) were sold down yesterday, capping a year of losses. In fact Peabody, which terms itself as the world’s biggest coal miner, has seen its shares fall more than 65% in the past year. And at around $US6.3 billion, its market cap is little more than the $US5 billion it paid for Macarthur Coal, the Queensland miner, late last year. Peabody shares have fallen from more than $US61 a year ago to $US22.44 at the close Tuesday.
Patriot shares lost more than US$7 billion in value this year and the shares slumped 72% on Monday on reports that it would file for bankruptcy later that day. The shares were priced at nearly $US23 a year ago. on Monday at the close they were worth just 61 US cents.
The company cut thermal coal production by more than 4 million tonnes in May, trimmed costs, tried to boost output and exports of coking (metallurgical) coal and laid off 1,000 employees and contractors. But it wasn’t enough as the company faced a growing number of customers who reneged on coal purchase contracts because of the collapse in prices drove the market price down sharply and well under the prices in the contracted deals. Those customers have either cut their purchases of coal or switched to gas.
Patriot Coal is a leading coal producer and marketer in the eastern US. In 2011, it sold 31 million tonnes of coal, of which 76% went to domestic and international power companies and industrial customers and the rest went to domestic and global steel and coke producers. It has 13 mines northern West Virginia, in southern West Virginia and in western Kentucky. It has reserves of around 1.9 million tonnes of coal. It will either be slimmed down or broken up and sold off. But it won’t be a bargain.
Given the slump in demand and the rise in US gas output, any sale won’t recover asset values in the balance sheet. That in turn will put pressure on other coal miners to cut the value of their assets, which in turn could trigger problems with banks and other financiers.
The US gas boom has been underway for several years. As this report implies (but doesn’t spell out), shale gas has notable implications for the Australian coal export boom, gas projects and the greenhouse gas/AGW debate…
The carbon tax is likely to be ineffectual in reducing emissions, has numerous unintended consequences and is likely to be repealed or castrated in the near future. The Greens hate fossil fuel substitution (i.e. replacing say, brown coal with gas), yet as the US example shows, drastic reductions in emissions can be achieved…
Attempting to reduce emissions with current renewable technogies has proved to be an expensive farce.
As John MacEnroe would say of climate millenarians and their unwilling followers like Gillard et al, they cannot be serious…
How typical of Crikey that after two days this is the only comment on this important article.
and how typical of Crikey that the above innocuous comment should be blocked “in moderation”. FFS, it was written in imitation of an “Age” piece…
Recent research suggests that gas obtained by “fracking”, that is, tight gas and shale gas, results in considerable release of methane to atmosphere. Methane being an (albeit relatively short lived greenhouse gas, studies have shown that such “unconventional” gas may well have a greenhouse gas emissions footprint, in CO2 - equivalent, as high as, or higher than, coal.
I would query this last statement. Power companies, steel and coke producers, and industrial consumers, don’t generally have the ability to switch fuels as simply as that. The considerable investment in infrastructure required to convert fuel sources would have to be carefully considered against the background of price volatility across all fossil fuels in recent years, and likely volatility in greenhouse gas emissions regulation and taxation. That is to say, you don’t just convert your power station to gas because gas is cheaper than coal this year…. It’s a much longer term decision, and I’d be surprised if the bulk of the businesses concerned have taken this step, especially given the central premise of the article, which is the falling price of coal.
It seems far more likely that those customers have reneged on their (high priced) purchase contracts with Patriot, then purchased coal from another provider at the cheaper rate . Any break costs associated with such contractual default would be factored into the decision, and the net result, given the unexpected magnitude of the decline in coal prices, would probably be cashflow positive for the coal buyers.
Frank,
Have you seen the types of contaminants and heavy metals that are pumped into the water table & how much water is used in getting this gas??
Just remember these aquifers are also used for our food crops, perhaps you should watch Gasland by Josh Fox & get a little more insight about this process.
Owen/Planet: shale gas, fracking etc indeed have many nasties attached.
the Greens were very late to wake up to Gasland. The hypocrisy of their belated campaign to support Lock the Gate is stark. And they still haven’t woken up to the economic effects- which Dyer’s piece addresses (up to a point).
At the moment we have the Morwell river ingesting an entire brown coal open cut, before being pumped out- into the Gippsland lakes…
For several years the climate cult managed to reduce the meaning of “pollution” to CO2. Armageddon ensured that all other forms of environmental damage were relegated or ignored.
But reality is re-imposing itself. The Greens need to be redefined. They need to apologise for the decade of hysteria they’ve imposed- and start making up lost ground.
Serious question for Frank, in your broad definition of The Greens, where does the Climate Change Coaltion, which contested senate elections, fit?
Or the single-issue Wilderness Society also independent political players of an environmental bent.
Your criticisms are broadly correct and your perceptions on these other political groups may help the call for a redefinition of The Greens by identifying and isolating the fakes.
Like the “Climate Change Coalition”, who the hell were, are these people, who certainly did not like The Greens, and competed with them for votes, presumably because they were not “specialising”
enough on the infamous single-issue of “Climate Change”.
Hamis…: yes the “climate change coalition” lasted as a political party from 2007 to 2010. Preferenced the Oz Democrats.
They were a single-issue group, i.e. pushing “climate action”. My assumption is that they were essentially Aust Dems who didn’t like the Greens…anyway, they’re now in the rubbish bin of history.
as for the Wilderness Society etc, their agendas have all been corrupted to some extent by climate hysteria…unlike the Greens, they’ll probably recover.
The AYCC, “youth coalition” is of course a single-issue cult-driven group (led by the inane Anna Rose and others…she is now married to Simon Sheik of Get-Up).
The Oz political class is nothing if not incestuous…
Thank you Frank. 2007, the election where the splitting of The Greens vote by the Climate Change Coaltion achieved the failure to re-elect Kerry Nettle, Environmental Scientist. as a Greens Senator for NSW.
Kerry curried disfavour among the single issue extemists by stating, in accordance with their principles, that quote: The Greens are not just about the environment”.
Aided by the “Hate Medias’” election of the dear Doctor as “leader” of the Greens, consequently squeezing Nettle out of publicity by a factor of 6/1, in her own state. (did the Count on Newsbank)
The present Greens Senators need to closely watch the hate medias’ new, unelected, Leader of The Greens. They ought to remember what happened to Nettle. Perhaps they do.